Monday, January 15, 2007

Hate to say I told you so, but...

BDO Stoy Hayward (the UK arm of accounting firm BDO International) is set to release a report saying that business fraud in the UK increased 40 percent in 2006. (See Fraud costs rise 40 per cent to record levels in 2006). Some of this is fraud at businesses, where companies are the victims. But others clearly involve financial fraud, with total costs to UK businesses this past year alone in the £5 billion (about $10 billion) range -- in other words, approximately the size of the Worldcom fraud.

“In 2007 I...expect to see problems from frauds hitting venture capitalists and corporate lenders. A lot of money has been lent over a short period of time to management teams for investment and acquisitions. Based on experience in the dotcom boom I have no doubt some business plans will have been deliberately over-optimistic, and property, including intellectual property, falsely valued. When the tide goes out you can see who is swimming without their trunks on. If interest rates continue to nudge up in 2007 under-performing but over-valued businesses will quickly be exposed.”

A related story by Paul Tharp of New York Post (who has apparently seen a pre-release copy of the report -- see Brits get bit) actually puts some of this blame on small American start-ups listing in London to avoid the tighter regulatory controls in the United States:

The report by accounting firm BDO Stoy Hayward stopped short of blaming the crime wave on the influx of tiny American startup companies and their entourages, who've fled the stricter U.S. stock exchanges in New York to London, where lately it's easier to list shares and get investors' cash.

By going public on the London Stock Exchange under its CEO, Clara Furse, or its sister London AIM (Alternative Investment Market), a startup company has fewer regulatory and auditing requirements than if they listed on a U.S. exchange - a fact that's aggravated the New York Stock Exchange and the Nasdaq, cost them listings and raised outcries here by leading politicians.

...

British market watchers believe that shrewd charlatans, whose financial tricks are well known to U.S. authorities, are having a field day in the laid-back London scene.

I particularly like that last part. But this is hardly surprising. As I've noted previously, the UK Financial Services Authority's risk-based approach to regulatory oversight means that the vast majority of the firms it regulates are categorized as "low-impact" and thus never inspected or looked at closely in any meaningful fashion. But, hey, you pays your money you takes your chances. When you've got a regulatory system that prides itself on its "lighter touch," you're essentially relying on the better angels of our nature to keep the financial markets clean.

And my guess is that will work as well for the UK capital market in 2007 as it did for Lincoln in 1861.

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About me

A fatwa traditionally is a legal opinion or decree handed down by a Muslim legal scholar. I'm not a Muslim legal scholar, or at all knowledgable about Shariah. But, then, neither are a lot of people who issue fatwas these days.